Advantages of Cost Utility Analysis and Budgeting in Health Economics Research

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Unlike cost-benefit analysis (CBA), cost-effectiveness analysis (CEA) do not assess outcomes in term of monetary units, rather, it uses the most appropriate units to describe the benefits and outcomes of an intervention. Outcomes are often reported in a cost-effectiveness analysis in terms of survival, progression-free survival, response rate, etc. In other words, cost effectiveness analysis examines interventions from two angles: cost and effectiveness.

To compare a new intervention to an older intervention in a cost effectiveness analysis, we calculate the ratio between the increase in cost and the increase in mean effectiveness. This ratio is often referred to as the incremental cost effectiveness ratio (ICER), which represents the additional cost to obtain an additional unit of outcome (e.g. 1 more year of life). If the incremental cost-effectiveness ratio is lower than a pre-defined value, then we consider the new intervention cost effective. Alternatively, we can also calculate the cost effectiveness ratio by dividing the cost of an intervention with its effectiveness (often calculated by subtracting with a control arm).

There are two main criticisms of cost effectiveness analysis. Cost effectiveness analysis only compares two interventions; hence, policy makers cannot use results of CEA from different studies, if they use different outcomes. Second, a single outcome often cannot capture all the effects of an intervention. For instance, if you use life year to quantify outcome then you may fail to take into account the side effects of the intervention. An intervention may save life and cost-effective but it might make patients miserable and have low quality of life.

Cost utility analysis overcomes the limitations of cost-effectiveness analysis by introducing a quantity called quality-adjusted life year (QALY), which is life year weighted by the perceived quality of life. You can read more about QALY here. Typically, an intervention with an incremental cost of less than $50,000 per QALY is considered cost-effective. This threshold is based on 1982 dollars and thought to be too low for current cost utility analysis. Higher thresholds have been proposed in recent studies.

Budget impact analysis (BIA) is used to address whether an intervention is affordable by the public. The problem arises since many interventions are cost effective based the results of CUA and CEA, yet they are too expensive. Budget impact analysis has become particularly popular in the last few years since many new drugs and treatments, especially cancer drugs, are very costly.

Budget impact analysis compares costs of current care versus cost of a new scenario which includes the new intervention. Budget impact analysis also accounts for change in demand as patients switch from old intervention to new intervention.


Economic Evaluations of Medical Care Interventions for Cancer Patients. How, Why, and What Does it Mean? Ya-Chen Tina Shih, PhD and Michael T. Halpern, MD, CA Cancer J Clin 2008; 58:231-244

How much does a healthy year of your life cost?

This post is part of the series: Health economics - The Primer

This series of articles will introduce readers to the emerging field of health economics. We will review how health economics influence decision making process in health care and the basic tools used in health economics.

  1. The Role of Health Economics
  2. Cost of Health Care
  3. Classification of Health Economic Analyses
  4. Health Economics Research: Cost Utility Analysis And More
  5. How Much Does a Healthy Year of Your Life Cost?